Economy

EXPLAINER: Is China capturing Africa with debt?

by STEPHEN ONYEKWELU

September 21, 2018 | 11:31 am
  |     |     |   Start Conversation
China's President Xi Jinping and the lead beneficaries of his "Predatory Loan Practices"

There was outrage during the week ending September 07, when Zambia, the landlocked southern African nation allegedly lost ownership of ZNBC, its broadcasting corporation, was about to lose  ZESCO, its utility company and the national airport to China due to loan repayment default.

 

While these claims were eventually denied by the government, it re-ignited a conversation that has been seething in the minds of keen observers of China’s trade, investment and aid practices in Africa. Some have directly or indirectly alluded to a new form of colonization, though this time not from the West but the East.

 

As at 2014, Nigeria was the sixth country on the list of third world countries that had received aid from China. It received the sum of $3.1 billion. This amounts to N1.1 trillion.

 

In the last three years, Nigeria has received $6 billion for infrastructure, which amounts to N2 trillion. The combined figures is put at about N3 trillion, and when divided by 198 million, considered to be the country’s population at the moment, every Nigerian owes China about N15, 000.00. Nigeria has also accepted the Chinese Yaun as a reserve currency, which will begin to compete with the US dollar.

What do all these mean?

Some critics have argued that China’s Belt and Road initiative, modelled on the Silk Road, was a giant “debt” and akin to “neo-colonialism.”

Early this year, Rex Tillerson, then secretary of state of the United States of America stated that “Chinese investment does have the potential to address Africa’s infrastructure gap” but at the same time acknowledged that “its approach has led to mounting debt and few, if any, jobs in most countries” even as it “encourages dependency using opaque contracts, predatory loan practices, and corrupt death”, a story published August 31, by Foreign Policy, a magazine that seeks to connect the dots among places, people and politics, outlined.

Loan galore

Presidents and ministers from across Africa convened in Beijing for the seventh Forum on China-Africa Cooperation, a lavish pageant designed to showcase China’s engagement with African nations. At the last FOCAC, Chinese President Xi Jinping pledged a massive $60 billion in commercial loans to Africa, a sum that far outstrips U.S. lending and investments.

Since the first FOCAC in 2000, China has grown from bit player in Africa to the source of nearly $200 billion in trade. From 2001 to 2011, China also committed $75 billion in aid to the continent, about 20 percent of the $404 billion total that the Organization for Economic Cooperation and Development’s Development Assistance Committee calculated for the period.

 

The United States promised somewhat more—$90 billion in the same period—but Chinese aid is more sought after. Unlike Western assistance, which comes mainly in the form of outright transfers of cash and materiel, Chinese assistance consists mostly of export credits and loans for infrastructure (often with little or no interest) that are fast, flexible, and largely without conditions.

 

Thanks to such loans, the International Monetary Fund estimates that, as of 2012, China owned about 15 percent of sub-Saharan Africa’s total external debt, up from only 2 percent in 2005. McKinsey & Co. also reckons that, as of 2015, Chinese loans accounted for about a third of new debt being taken on by African governments.

Debt trap?

China has been accused of using debt to capture African economies, through murky loan practices. The word is debt-trap.

 

Debt traps are circumstances in which it is difficult or impossible for a borrower to pay back money that they have borrowed. These traps are usually caused by high interest rates and short terms, and are a hallmark of a predatory lending.

 

However, is China bent on annexing African economies or are African economies failing to seize opportunities China trade and investments can bring.

 

According to the African Development Bank, Africa needs $130 to $170 billion worth of new infrastructure annually – from trains to power stations. The continent will also face additional costs due to climate change of $20 to $30 billion per year. But African countries are not large or rich enough to pay for this by themselves – they need external help, and in particular loans.

 

Most African governments are not irresponsibly burdening their citizens with debt. There is only one African country with external loans that are equal to or larger than the size of its economy – the successful Mauritius – in contrast to the U.K. and France, which have debt-to-Gross Domestic Product (GDP) ratios of well over 100 percent.

 

Although in the case Zambia, the outrage from civil society organisations is on the lack of transparency from government over many key questions, including repayment, contracting obligations, project feasibility, value for money and loan security. This lack of transparency makes it impossible to have a clear account of the implications of this borrowing for the public finances.

 

What needs to be done?

Loans from China do need improvement. In particular, the current Chinese policy of requiring that every loan should go to a project that is built by a Chinese company, known as “tying”, needs to change.

 

China is not alone in the practice of “tying,” some Japanese loans are tied too. Loans from the United Kingdom used to have similar terms, until a scandal in 1988 demonstrated that tying overseas finances to domestic business creates massive conflicts of interest.

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by STEPHEN ONYEKWELU

September 21, 2018 | 11:31 am
  |     |     |   Start Conversation

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